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The Global Financial Crisis, the G-20 & S&P/ASX 200 Index.

November 5th, 2011 · Greg Atkinson · 13 Comments

The continuing debt crisis in Europe is a reminder to investors that we are still in the midst of the Global Financial Crisis (GFC) which first gripped the markets back in 2008.  The G20’s first cunning plan to spend their way out of trouble didn’t do much to fix the root causes of the GFC and so they are gathered once again for another talkfest which at best, might give the markets a kick upwards for a few days.

We are now near the end of 2011 and yet the global economy is still dealing with many of the same issues as it was back in late 2008 after the Lehman Brothers collapse.  This time however there is a lot less money to throw around plus Chinese economic growth is slowing.

Back in early 2010 however the G20 Finance Ministers and Central Bank Governors were patting themselves on the back because they reckoned the worst of the GFC was over.  On the 23rd April 2010 they released a communiqué after their gathering in Washington which included this gem:

“The global recovery has progressed better than previously anticipated largely due to the G20?s unprecedented and concerted policy effort. ”

I didn’t agree with their rosy view and after the G20 meeting I wrote an article entitled Another G20 love-in, the global recovery and China.

In that article I summed up my view of the global economy at that time as follows:

“At present the global economy is slowly recovering, but the big spending policies of the G20 are going to cause problems for many member nations in years ahead.

So rather than lavish themselves with praise, perhaps the G20 meeting member’s could show a little more humility and acknowledge the fact that all they have really done so far is spend their way of of trouble. Maybe their policies have worked, but I reckon it is far too early to declare mission accomplished at this stage.”

Alas as I write today the G20 crowd are now dealing with the problems they created by trying to spend their way out of trouble just as I suggested.

The question for stock market investors is how might the continuing GFC play out and what impact with this have on the Australian stock market.

To assist in trying to answer that question let’s look at the candlestick chart over 4 years for the S&P/ASX 200 Index.

S&P/ASX 200 Index (XJO) 4 year candlestick chart

asx-200-4-year-candlestick-chart-nov-11

On the chart above I have highlighted what I see as the 4 main stages of the GFC (so far)  in terms of how they have impacted the ASX 200.

I am using monthly candlestick chart as this best shows how stocks were swinging up or down and clearly shows the periods when the market was falling or rallying. A red candlestick means the market fell for the month, blue or black means the market rose.

Stage 1 of the GFC hit the S&P/ASX 200 in late 2007 after the market hit an all time high of just over 6700. (yes the ASX 200 was once up that high)   As you can see from the candlestick chart, stocks fell in all but three months between November 2007 and February 2009.  That was quite a slump!

Stage 1 was all about shock.  First the financial crisis struck in the U.S. but it then quickly spread and suddenly everyone appeared to be tracking the daily movements of the LIBOR. The fear back then was that the financial markets would seize up.

During the middle of 2007 the ASX 200 paused around the 5000 level and at that point I thought we were near the bear market bottom.  But then Lehman Brothers imploded and markets around the world took another plunge downwards.

Finally the ASX 200 did find a bottom in early March at around 3100 points (yes the ASX 200 did get that low) and this heralded the beginning of Stage 2.

The Australian stock market rallied during Stage 2 largely because many G20 nations decided to borrow and spend in an attempt to get their economies going.  Luckily for Australia, China also announced plans for a massive economic stimulus programme and that sent commodities prices for iron ore & coal for example heading towards historic highs again.

The stock market also rallied because it was oversold and investors were tempted to buy into a market in which there appeared to be a lot of cheap high quality stocks.

Generally speaking 2009 was a good one for stocks and if you look at the candlestick chart you can see that from March to November 2009 there was only one month where the ASX 200 fell back.

By the end of 2009 however,  investors were once again starting to worry about debt and the strength of the global economic recovery, consequently the stock market rally fizzled out.  Hence Stage 3 of the ASX 200’s journey through the GFC begun. (indicated on the chart by the grey line)

Basically Stage 3 involved investors waiting to see what would happen. I refer to this period as the “Twilight Zone” and first wrote about such a period in July 2009 in The Economic Twilight Zone.

There were a few moments during which the stock market bounced around, but the overall trend from late 2009 until early 2011 was sideways.  As you can see from the ASX 200 candlestick chart above not much happened and it was trading around the same level in late 2009 as it was in March 2011.

Then around April 2011 the ASX 2oo entered Stage 4 and the Global Financial Crisis became increasingly focused on Europe.  Investors by this time had accepted that the U.S. economy would struggle for years and now the major concern was how bad would it get in Europe.

It’s impossible at this point to judge how long it will take the European Union to deal with it’s debt crisis.  Once they deal with Greece they will then need to focus on Italy (as they are starting to do now) while keeping an eye in Ireland, Spain & Portugal as well.

At the same time the U.K economy looks feeble, the French economy may enter a recession and even the Germany economy is showing signs of weakness.

I have highlighted Stage 4 on the ASX 200 candlestick chart using a circle which is my way of saying it’s a work in progress.  I am not sure how this stage will play out but my guess is it will be followed at some point by a stage that will be all about China.

So where will the S&P/ASX 200 Index go from here?  The short and honest answer is that I don’t have a clue.  There are many unresolved issues that could push the market lower or higher such as the mining tax, the possible removal of Gillard as Prime Minister, an early election and the carbon tax.

On top of these Australian domestic issues we don’t know by how much the Chinese economy will slow, how bad things will get in Europe and who will be running the show in the U.S. after next years presidential election.

So it’s hard to pick which way to market will go over the next few months but despite all the gloom, I still think there is a chance of an end of year rally. But I don’t think this will set up the next bull market and the chances are we will see another wave of selling if the numbers coming out of China worry the markets.

Greg Atkinson is the editor of Shareswatch Australia and the Managing Director of Ohori Capital He is originally from Australia but currently resides in Japan. He can be followed on twitter via @GregAtkinson_jp


13 responses so far ↓

  • 1 Biker // Nov 5, 2011 at 1:20 pm

    “…even the Germany economy is showing sighs of weakness…”

    I imagine *sigh*ing is one of the milder forms of expression! 😉

  • 2 Leigh // Nov 5, 2011 at 1:38 pm

    Great chart. It does make you think that now is the time not to be rash, or in fact not to do anything. I wonder if charts of a longer period would show this 2008/2011 period to be a hiccup or a heart attack. At least a thirty year chart might make us feel a little better by squeezing this period into a smaller perspective.

  • 3 Plornt // Nov 5, 2011 at 2:01 pm

    Great article Greg. I don’t really have a clue either.
    We just dont have enough information out there to make a decent guess with respect to human actions. Alot of us (including me at times) think we have enough info, but alot of the politicians for example in Greece, are hiding key info or make random decisions based on unforseen dynamic motives. I guess at the end of the day actions not words. As was the case with MF Global, its reputation was not enough to trust someone. You have to ensure situations where there is no possible motive (even if they deny it) and just assume human nature will do its thing in other situations.

    Things I usually watchout for with public companies are: Too much criticising (arguably means they have a tonne of stuff to hide). Fierce defending of reputation — again arguably hiding alot. Its almost like an illusion; alot of “good” companies try to make themselves appear they are great, to have the best reputation, but still screw the consumer with lies and with a hypocritical moral compass.

    This drivel should not be taken as financial advice. Seek to obtain professional
    advice before proceeding with any financial decision.

  • 4 Greg Atkinson // Nov 5, 2011 at 3:04 pm

    For a while in 2009 it looked like a nice little V-shaped market recovery might be possible but I think most investors knew that that would be unlikely. Still it did make a nice pattern 🙂

    My gut feeling is there is still some more bad news to come and a few more prickly issues to deal with. For example a slowdown in China, perhaps a recession in Australia plus a few more nasties of course from Europe.

    @Leigh, I will try and dig up a long term chart soon and see how this GFC fits in. I guess at the moment it will stock out like a sore thumb but that is nothing a nice juicy bull market wouldn’t fix!

    @Plornt, I agree with you comments about public companies especially those in the financial & banking sector.

  • 5 Biker // Nov 5, 2011 at 11:28 pm

    Yes, it’s always difficult to predict the future!~

    Greg: “…perhaps a recession in Australia…”

    Someone else here made a more precise estimate of recession in Australia for 2011 or 2012. The prediction was based on a number of doomsday scenarios for 2011, including bank failures this year.

    It seems to me that fear is the dominant factor in so many dark scenarios related to perceptions of economics at the moment. Despite the possibility of these expressions becoming a self-fulfilling prophecy, I checked this morning… and the sun did come up, the world continued to turn, new cars predominated on our roads, the shops were full and the queues long… and it all looked pretty good to me… . 😉

  • 6 Lachlan // Nov 6, 2011 at 4:23 am

    ..but I guess we are lucky to live in this part of the world BP.
    25M people and more food and energy etc than we can consume for centuries. The financial crisis is really just a currency/banking problem with many unlucky people trapped in the sandwich. Tangible assets are all still there last I looked 😉

  • 7 Greg Atkinson // Nov 6, 2011 at 7:34 am

    @Biker – a recession is not a doomsday scenario, they are part of the economic cycle. There doesn’t need to be a bank failure in Australia to trigger a recession and if the economies in Europe & the U.S. keep bumping along the bottom then it is going to cause problems in Australia.

    @Laclan – the financial crisis is more than just a currency or banking problem now. It has affected the values of tangible assets (think real estate in the U.S for example) and has resulted in millions of people losing their jobs in Europe & the U.S. It may appear like just a banking crisis but it is more than that to a lot of people including many small businesses owners in Australia.

  • 8 Not Fooled By Property Spruikers Hype // Nov 6, 2011 at 8:13 am

    @ Biker … “I checked this morning… and the sun did come up, the world continued to turn, new cars predominated on our roads, the shops were full and the queues long… and it all looked pretty good to me… ”

    You must of skipped Saturday’s West Australian or not watched any of the news channels in Perth either.

    REIWA confirmed that Perth property prices fell $30,000 in the Sept Qtr. (That’s one Qtr not the year) A direct result of uncertainty caused by global instability.

    As a property investor life could not be looking as good as you claim.

  • 9 Biker // Nov 6, 2011 at 9:04 am

    NF: “As a property investor life could not be looking as good as you claim.”

    http://www.watoday.com.au/business/property/property-discounts-disappearing-amid-flickers-of-life-in-market-20111104-1n078.html

    Well, our accountant thought we had done very well, on Friday, examining our 2011 activities, which included the sale of a block of land for a major capital gain, higher rents… and a record tax refund.

    We may see the world through rose-coloured glasses in your opinion, but you’re _completely in the dark_ about property and the comfort tangible assets offer people our age.

    Exactly a month to go as we anticipate the *POP*ping you’ve promised West Australians, NF. Don’t like your chances… . 😉

  • 10 Biker // Nov 6, 2011 at 9:09 am

    Lachlan, Australia is one of only two countries I’d ever consider. We’re blessed, mate!~ 😀

    Greg, in my references to potential recession I should have referred to the full list of miscalls, not just banks.

    Out of (unusually misplaced) kindness, I restricted the list
    to banks… .

  • 11 Greg Atkinson // Nov 6, 2011 at 9:11 am

    Let’s stay clear of the WA property market. The subject has been discussed ad nauseam.

  • 12 Mr Editor // Nov 7, 2011 at 6:52 am

    Excellent post, Greg. The stock market could go either way, but, as you said, so many problems linger that there is a strong bearish bias.

  • 13 Greg Atkinson // Nov 7, 2011 at 8:04 am

    Mr Editor at the moment I am watching the reports coming from major Japanese companies as they have their finger on the pulse in terms of what is happening in China. What I am seeing so far is many companies in Japan bracing themselves for a slowdown in China especially in the construction sector which as we know is the big driver of GDP growth in China.

    Even the RBA and Chairman of RIO Tinto are talking about a China slowdown now, so it seems wise to me to keep watching the Chinese economy very closely.

    The Baltic Dry Index is also on the way down again so that isn’t a good sign either.

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